Exhibit 99.1
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2014
(Unaudited)
1
Condensed Consolidated Balance Sheets
| (Unaudited) | ||||||||
| March 31, | December 31, | |||||||
| (millions of US$) | 2014 | 2013 | ||||||
| Assets | ||||||||
| Current | ||||||||
| Cash and cash equivalents (note 22) | 532 | 364 | ||||||
| Accounts receivable | 1,172 | 1,117 | ||||||
| Risk management (note 16) | 13 | 17 | ||||||
| Income and other taxes receivable | 58 | 52 | ||||||
| Restricted cash (note 8) | 102 | 121 | ||||||
| Inventories | 141 | 137 | ||||||
| Prepaid expenses | 19 | 14 | ||||||
| Assets held for sale (note 4) | 87 | 776 | ||||||
| 2,124 | 2,598 | |||||||
| Other assets (note 7) | 175 | 160 | ||||||
| Restricted cash (note 8) | 97 | 94 | ||||||
| Investments (note 5) | 1,380 | 1,204 | ||||||
| Risk management (note 16) | 23 | 20 | ||||||
| Goodwill (note 6) | 570 | 575 | ||||||
| Property, plant and equipment (note 9) | 9,678 | 9,752 | ||||||
| Exploration and evaluation assets (note 9) | 3,060 | 3,165 | ||||||
| Deferred tax assets | 1,659 | 1,593 | ||||||
| 16,642 | 16,563 | |||||||
| Total assets | 18,766 | 19,161 | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Bank indebtedness | 17 | 13 | ||||||
| Accounts payable and accrued liabilities | 1,905 | 1,835 | ||||||
| Current portion of Yme removal obligation (note 8) | 102 | 121 | ||||||
| Risk management (note 16) | 120 | 101 | ||||||
| Income and other taxes payable | 112 | 155 | ||||||
| Loans from joint ventures (note 5) | 306 | 288 | ||||||
| Current portion of long-term debt (note 13) | 5 | 882 | ||||||
| Liabilities associated with assets held for sale (note 4) | 51 | 160 | ||||||
| 2,618 | 3,555 | |||||||
| Decommissioning liabilities (note 11) | 1,664 | 1,727 | ||||||
| Yme removal obligation (note 8) | 134 | 131 | ||||||
| Other long-term obligations (note 14) | 266 | 246 | ||||||
| Risk management (note 16) | 20 | 37 | ||||||
| Long-term debt (note 13) | 4,360 | 4,357 | ||||||
| Deferred tax liabilities | 715 | 553 | ||||||
| 7,159 | 7,051 | |||||||
| Contingencies and commitments (note 17) | ||||||||
| Shareholders' equity | ||||||||
| Common shares (note 15) | 1,759 | 1,723 | ||||||
| Preferred shares (note 15) | 191 | 191 | ||||||
| Contributed surplus | 114 | 135 | ||||||
| Retained earnings | 6,114 | 5,695 | ||||||
| Accumulated other comprehensive income | 811 | 811 | ||||||
| 8,989 | 8,555 | |||||||
| Total liabilities and shareholders' equity | 18,766 | 19,161 | ||||||
| See accompanying notes. | ||||||||
2
Condensed Consolidated Statements of Income (Loss)
| (Unaudited) | ||||||||
| Three months ended March 31, | ||||||||
| (millions of US$) | 2014 | 2013 | ||||||
| Revenue | ||||||||
| Sales | 1,287 | 1,098 | ||||||
| Other income (note 18) | 48 | 27 | ||||||
| Income (loss) from joint ventures and associates, after tax (note 5) | 6 | (2 | ) | |||||
| Total revenue and other income | 1,341 | 1,123 | ||||||
| Expenses | ||||||||
| Operating | 361 | 329 | ||||||
| Transportation | 49 | 51 | ||||||
| General and administrative | 105 | 103 | ||||||
| Depreciation, depletion and amortization | 469 | 421 | ||||||
| Impairment (note 10) | 130 | 7 | ||||||
| Dry hole | 16 | - | ||||||
| Exploration | 52 | 75 | ||||||
| Finance costs (note 12) | 91 | 78 | ||||||
| Share-based payments expense (recovery) (note 15) | (32 | ) | 22 | |||||
| Loss on held-for-trading financial instruments (note 16) | 60 | 80 | ||||||
| Gain on disposals (note 4) | (559 | ) | - | |||||
| Other, net (note 19) | 8 | 6 | ||||||
| Total expenses | 750 | 1,172 | ||||||
| Income (loss) before taxes | 591 | (49 | ) | |||||
| Income taxes (note 20) | ||||||||
| Current income tax | 131 | 147 | ||||||
| Deferred income tax (recovery) expense | (31 | ) | 17 | |||||
| 100 | 164 | |||||||
| Net income (loss) | 491 | (213 | ) | |||||
| Per common share (US$): | ||||||||
| Net income (loss) | 0.47 | (0.21 | ) | |||||
| Diluted net income (loss) | 0.43 | (0.21 | ) | |||||
| Weighted average number of common shares outstanding (millions) | ||||||||
| Basic | 1,032 | 1,027 | ||||||
| Diluted | 1,039 | 1,031 | ||||||
| See accompanying notes. | ||||||||
3
Condensed Consolidated Statements of Comprehensive Income (Loss)
| (Unaudited) | ||||||||
| Three months ended March 31, | ||||||||
| (millions of US$) | 2014 | 2013 | ||||||
| Net income (loss) | 491 | (213 | ) | |||||
Actuarial gains (losses) relating to pension and other post-employment benefits1 | - | 3 | ||||||
| Other comprehensive income (loss) not being reclassified to net income or loss in subsequent periods | - | 3 | ||||||
| Comprehensive income (loss) | 491 | (210 | ) | |||||
| 1. Net of tax of $nil (2013 - $3 million) | ||||||||
| See accompanying notes. | ||||||||
4
Condensed Consolidated Statements of Changes in Shareholders’ Equity
| (Unaudited) | ||||||||
| Three months ended March 31, | ||||||||
| (millions of US$) | 2014 | 2013 | ||||||
| Common shares (note 15) | ||||||||
| Balance at beginning of period | 1,723 | 1,639 | ||||||
| Issued on exercise of stock options | 5 | 25 | ||||||
| Shares released from trust for long-term PSU plan | 31 | 44 | ||||||
| Balance at end of period | 1,759 | 1,708 | ||||||
| Preferred shares (note 15) | ||||||||
| Balance at beginning of period | 191 | 191 | ||||||
| Issued | - | - | ||||||
| Balance at end of period | 191 | 191 | ||||||
| Contributed surplus | ||||||||
| Balance at beginning of period | 135 | 121 | ||||||
| Settlement of long-term PSU plan grant | (31 | ) | (44 | ) | ||||
| Share-based payments | 10 | 15 | ||||||
| Balance at end of period | 114 | 92 | ||||||
| Retained earnings | ||||||||
| Balance at beginning of period | 5,695 | 7,148 | ||||||
| Net income (loss) | 491 | (213 | ) | |||||
| Actuarial gains transferred to retained earnings | - | 3 | ||||||
| Common share dividends (note 15) | (70 | ) | (70 | ) | ||||
| Preferred share dividends (note 15) | (2 | ) | (2 | ) | ||||
| Balance at end of period | 6,114 | 6,866 | ||||||
| Accumulated other comprehensive income | ||||||||
| Balance at beginning of period | 811 | 811 | ||||||
| Other comprehensive income | - | 3 | ||||||
| Actuarial gains transferred to retained earnings | - | (3 | ) | |||||
| Balance at end of period | 811 | 811 | ||||||
| See accompanying notes. | ||||||||
5
Condensed Consolidated Statements of Cash Flows
| (Unaudited) | ||||||||
| Three months ended March 31, | ||||||||
| (millions of US$) | 2014 | 2013 | ||||||
| Operating activities | ||||||||
| Net income (loss) | 491 | (213 | ) | |||||
| Add: Finance costs (cash and non-cash) (note 12) | 91 | 78 | ||||||
| Items not involving cash (note 21) | (7 | ) | 487 | |||||
| 575 | 352 | |||||||
| Changes in non-cash working capital | (104 | ) | (21 | ) | ||||
| Cash provided by operating activities | 471 | 331 | ||||||
| Investing activities | ||||||||
| Capital expenditures | ||||||||
| Exploration, development and other | (547 | ) | (569 | ) | ||||
| Proceeds of resource property dispositions (note 4) | 1,340 | - | ||||||
| Yme removal obligation, net of settlement (note 8) | 16 | 282 | ||||||
| Restricted cash, net of settlement (note 8) | (16 | ) | (245 | ) | ||||
| Investments | - | (7 | ) | |||||
| Loan to joint venture, net of repayments (note 5) | (172 | ) | (70 | ) | ||||
| Changes in non-cash working capital | 50 | (84 | ) | |||||
| Cash provided by (used in) investing activities | 671 | (693 | ) | |||||
| Financing activities | ||||||||
| Long-term debt repaid (note 13) | (877 | ) | - | |||||
| Long-term debt issued | - | 93 | ||||||
| Loans from joint ventures, net of repayments (note 5) | 18 | 110 | ||||||
| Common shares issued (note 15) | 4 | 16 | ||||||
| Finance costs (note 12) | (76 | ) | (70 | ) | ||||
| Common share dividends (note 15) | (70 | ) | (70 | ) | ||||
| Preferred share dividends (note 15) | (2 | ) | (2 | ) | ||||
| Deferred credits and other | 7 | (9 | ) | |||||
| Changes in non-cash working capital | 15 | 18 | ||||||
| Cash (used in) provided by financing activities | (981 | ) | 86 | |||||
| Effect of translation on foreign currency cash and cash equivalents | 3 | (1 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 164 | (277 | ) | |||||
| Cash and cash equivalents net of bank indebtedness, beginning of period | 351 | 553 | ||||||
| Cash and cash equivalents net of bank indebtedness, end of period | 515 | 276 | ||||||
| Cash and cash equivalents | 532 | 319 | ||||||
| Bank indebtedness | (17 | ) | (43 | ) | ||||
| Cash and cash equivalents net of bank indebtedness, end of period | 515 | 276 | ||||||
| See accompanying notes. | ||||||||
6
Notes to the Interim Condensed Consolidated Financial Statements
(Unaudited)
(tabular amounts in millions of US dollars, except as noted)
1. CORPORATE INFORMATION
Talisman Energy Inc. (‘Talisman’ or ‘the Company’) is a public company incorporated pursuant to the laws of Canada and domiciled in Alberta, Canada, with common shares listed on the Toronto Stock Exchange and the New York Stock Exchange under the symbol ‘TLM’. The registered office is located at Suite 2000, 888 – 3rd Street SW, Calgary, Alberta, Canada, T2P 5C5.
The Company is in the business of exploration, development, production and marketing of crude oil, natural gas and natural gas liquids (NGLs).
The interim condensed Consolidated Financial Statements as at and for the three month period ended March 31, 2014 were approved by the Audit Committee on May 6, 2014.
2. BASIS OF PREPARATION
These interim condensed Consolidated Financial Statements have been prepared in accordance with International Accounting Standard (IAS) 34, Interim Financial Reporting as issued by the International Accounting Standards Board (IASB). Certain information and disclosures required to be included in notes to annual Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations of the International Financial Reporting Interpretations Committee (IFRIC), as issued by the IASB, have been condensed or omitted.
The interim condensed Consolidated Financial Statements should be read in conjunction with the audited annual Consolidated Financial Statements as at and for the year ended December 31, 2013 and the notes thereto.
These interim condensed Consolidated Financial Statements were prepared on a going concern basis, under the historical cost convention, except for certain financial assets and liabilities measured at fair value through the condensed Consolidated Statement of Income (Loss).
3. SIGNIFICANT ACCOUNTING POLICIES
a) Accounting Policies Used
The interim condensed Consolidated Financial Statements have been prepared following the same accounting policies and methods of computation as the audited annual Consolidated Financial Statements as at and for the year ended December 31, 2013, except for adoption of the following new standards and interpretations effective as of January 1, 2014:
Offsetting Financial Assets and Financial Liabilities
| · | IAS 32 Offsetting Financial Assets and Financial Liabilities - Financial Instruments Presentation. The amended standard requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and securities lending agreements. The amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014 and require retrospective application. As the Company is not netting any significant amounts related to financial instruments and does not have any significant offsetting arrangements, the amendment does not have an impact on the Company’s financial statements. |
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Impairment of Assets
| · | IAS 36 Impairment of Assets – Amendments to IAS 36. The amended standard requires entities to disclose the recoverable amount of an impaired Cash Generating Unit (CGU). The amendments to IAS 36 are effective for annual periods beginning on or after January 1, 2014 and require retrospective application. This standard does not have an impact on the Company’s financial position or performance. |
Levies
| · | IFRIC 21 Levies- Interpretation of IAS 37 Provisions, contingent liabilities and assets: IAS 37 sets out criteria for the recognition of a liability, one of which is the requirement for the entity to have a present obligation as a result of a past event. The interpretation clarifies that the obligation that gives rise to the liability to pay a levy is the activity described in the relevant legislation that triggers the payment of the levy. The Company reviewed payments considered to be levies and concluded that the application of the standard does not have a significant impact of the Company. |
b) Accounting Pronouncements Not Yet Adopted
The Company continues to assess the impact of adopting the pronouncements from the IASB as described below:
Financial Instruments
| · | IFRS 9 Financial Instruments: IFRS 9 sets out requirements for the classification and measurement of financial assets in November 2009, and was updated in October 2010 to incorporate financial liabilities. In November 2013, the IASB issued amendments to include the new general hedge accounting model. IFRS 9 (2013) does not yet have a mandatory effective date, but early adoption is allowed. At its February 2014 meeting, IASB tentatively decided that the mandatory effective date of IFRS 9 will be for annual period beginning on or after January 1, 2018. The Company continues to review the standard as it is updated and monitor its impact of the Company. |
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4. DISPOSALS AND ASSETS HELD FOR SALE
North America Disposition
In March 2014, Talisman completed the sale of its Montney acreage in northeast British Columbia for proceeds of $1.3 billion, resulting in a pre-tax gain of $565 million ($493 million after tax). The assets held for sale and liabilities associated with assets held for sale included in the Consolidated Balance Sheet as at January 1, 2014 were $776 million and $160 million respectively. The operating results from January 1, 2014 up to the date of closing were included in net income for the three month period ended March 31, 2014 and the gain was included in ‘Gain on disposals’ on the condensed Consolidated Statement of Income (Loss).
Sale of Colombian Pipeline Interest
In December 2013, Talisman sold its 12.152% equity interest in the Ocensa pipeline in Colombia for proceeds, net of disposition costs, of approximately $590 million, resulting in a pre-tax gain of $34 million. Talisman retained its crude oil transportation rights in the pipeline and retained its option to market any unused capacity to third parties.
Assets Held for Sale
In April 2014, Talisman sold non-core assets in western Canada for proceeds of $49 million, net of estimated closing adjustments.
The associated assets and liabilities of the property held for sale at March 31, 2014 have been classified separately on the Consolidated Balance Sheet and comprise the following:
March 31, 2014 | |
| Assets | |
| Property, plant and equipment (note 9) | 83 |
| Goodwill (note 6) | 4 |
| Assets held for sale | 87 |
| Liabilities | |
| Decommissioning liabilities (note 11) | 40 |
| Deferred tax liabilities | 11 |
| Liabilities associated with assets held for sale | 51 |
Immediately prior to the reclassification to assets held for sale, the disposal group was tested for impairment and no write down was necessary. The assets were not considered to be a discontinued operation as they do not represent a major line of business or geographical area of the Company.
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5. INVESTMENTS
March 31, 2014 | December 31, 2013 | |||||||
| Investments in Joint Ventures | ||||||||
| Equity investment in Equion | 943 | 920 | ||||||
| Equity investment in TSEUK | (623 | ) | (606 | ) | ||||
| Loan to TSEUK | 984 | 812 | ||||||
| 1,304 | 1,126 | |||||||
| Available-for-sale investments | ||||||||
| Transasia Pipeline Company Pvt. Ltd. | 34 | 34 | ||||||
| Other | 42 | 44 | ||||||
| 76 | 78 | |||||||
| Total | 1,380 | 1,204 | ||||||
Investments in Joint Ventures
Movement in investments in joint ventures during the period:
| Three months ended March 31, 2014 | Year ended December 31, 2013 | |||||||
Balance, beginning of period | 1,126 | 1,062 | ||||||
| Loan to TSEUK | 172 | 398 | ||||||
| Share of net income and comprehensive income (loss) | 6 | (334 | ) | |||||
Balance, end of period | 1,304 | 1,126 | ||||||
Talisman has a 49% interest in the ownership and voting rights of Equion Energía Limited (Equion) whose principal place of operations is Colombia. Talisman is one of two shareholders in this strategic corporate joint venture engaged in the exploration for, and development and production of crude oil and natural gas. The corporate joint venture is governed by a heads of agreement amongst the shareholders, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.
Talisman has a 51% interest in the ownership and voting rights of Talisman Sinopec Energy UK Limited (TSEUK) whose principal place of operations is the United Kingdom and is incorporated in England and Wales. Talisman is one of two shareholders in this corporate joint venture engaging in the exploration for, and development and production of crude oil and natural gas. The corporate joint venture is governed by a shareholders’ agreement, which requires that unanimous consent be obtained from the shareholders for all significant operating and financing decisions.
The following table summarizes the financial information of the joint ventures. The table also reconciles financial information to the carrying amount of the Company's interests in joint ventures, which are accounted for using the equity method.
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| Summarized Balance Sheets | March 31, 2014 | December 31, 2013 | ||||||||||||||||||||||
TSEUK1 | Equion1 | Total | TSEUK1 | Equion1 | Total | |||||||||||||||||||
| Cash and cash equivalents | - | 85 | 85 | 42 | 69 | 111 | ||||||||||||||||||
| Current assets | 691 | 407 | 1,098 | 527 | 304 | 831 | ||||||||||||||||||
| Loans receivable from shareholders | - | 624 | 624 | - | 587 | 587 | ||||||||||||||||||
| Non-current assets | 3,738 | 1,262 | 5,000 | 3,515 | 1,321 | 4,836 | ||||||||||||||||||
| Total assets | 4,429 | 2,378 | 6,807 | 4,084 | 2,281 | 6,365 | ||||||||||||||||||
| Bank indebtedness | 9 | - | 9 | - | - | - | ||||||||||||||||||
| Current liabilities | 774 | 486 | 1,260 | 700 | 420 | 1,120 | ||||||||||||||||||
| Loans payable to shareholders | 1,929 | - | 1,929 | 1,592 | - | 1,592 | ||||||||||||||||||
| Non-current liabilities | 3,089 | 299 | 3,388 | 3,131 | 315 | 3,446 | ||||||||||||||||||
| Total liabilities | 5,801 | 785 | 6,586 | 5,423 | 735 | 6,158 | ||||||||||||||||||
| Net assets (liabilities) | (1,372 | ) | 1,593 | 221 | (1,339 | ) | 1,546 | 207 | ||||||||||||||||
| Talisman’s interest | 51 | % | 49 | % | 51 | % | 49 | % | ||||||||||||||||
| Talisman’s share of net assets (liabilities) | (700 | ) | 781 | 81 | (683 | ) | 758 | 75 | ||||||||||||||||
| Goodwill | 77 | 162 | 239 | 77 | 162 | 239 | ||||||||||||||||||
| (623 | ) | 943 | 320 | (606 | ) | 920 | 314 | |||||||||||||||||
| Loan to TSEUK | 984 | - | 984 | 812 | - | 812 | ||||||||||||||||||
| 361 | 943 | 1,304 | 206 | 920 | 1,126 | |||||||||||||||||||
| 1. Balances represent respective entity’s 100% share. | ||||||||||||||||||||||||
| Summarized Statements of Income (Loss) | Three months ended March 31, 2014 | Three months ended March 31, 2013 | ||||||||||||||||||||||
TSEUK1 | Equion1 | Total | TSEUK1 | Equion1 | Total | |||||||||||||||||||
| Revenue | 303 | 163 | 466 | 406 | 207 | 613 | ||||||||||||||||||
| Operating | 284 | 21 | 305 | 293 | 22 | 315 | ||||||||||||||||||
| Transportation | 3 | 10 | 13 | 6 | 8 | 14 | ||||||||||||||||||
| General and administrative | 7 | - | 7 | 4 | - | 4 | ||||||||||||||||||
| Depreciation, depletion and amortization | 80 | 64 | 144 | 97 | 53 | 150 | ||||||||||||||||||
| Exploration expense | 3 | - | 3 | 3 | - | 3 | ||||||||||||||||||
| Finance costs | 32 | 1 | 33 | 18 | - | 18 | ||||||||||||||||||
| Impairment | - | - | - | 349 | - | 349 | ||||||||||||||||||
| Other | 12 | (11 | ) | 1 | (24 | ) | 7 | (17 | ) | |||||||||||||||
| Income (loss) before tax | (118 | ) | 78 | (40 | ) | (340 | ) | 117 | (223 | ) | ||||||||||||||
| Current income tax expense (recovery) | (27 | ) | 38 | 11 | (35 | ) | 54 | 19 | ||||||||||||||||
| Deferred income tax recovery | (58 | ) | (7 | ) | (65 | ) | (203 | ) | (18 | ) | (221 | ) | ||||||||||||
| Net income (loss) and comprehensive income (loss) | (33 | ) | 47 | 14 | (102 | ) | 81 | 21 | ||||||||||||||||
| Talisman’s interest | 51 | % | 49 | % | 51 | % | 49 | % | ||||||||||||||||
| Talisman’s share of income (loss) after tax | (17 | ) | 23 | 6 | (52 | ) | 40 | (12 | ) | |||||||||||||||
| Cash dividends received by Talisman | - | - | - | - | - | - | ||||||||||||||||||
1. Balances represent respective entity’s 100% share.
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| Summarized Statements of Cash Flows | Three months ended March 31, 2014 | Three months ended March 31, 2013 | ||||||||||||||||||||||
TSEUK1 | Equion1 | Total | TSEUK1 | Equion1 | Total | |||||||||||||||||||
| Operating activities | ||||||||||||||||||||||||
| Net income (loss) | (33 | ) | 47 | 14 | (102 | ) | 81 | (21 | ) | |||||||||||||||
| Add: Finance costs (cash and non-cash) | 32 | 1 | 33 | 18 | - | 18 | ||||||||||||||||||
| Items not involving cash | 33 | 57 | 90 | 220 | 35 | 255 | ||||||||||||||||||
| Changes in non-cash working capital | (148 | ) | (36 | ) | (184 | ) | (10 | ) | (21 | ) | (31 | ) | ||||||||||||
| Cash provided by (used in) operating activities | (116 | ) | 69 | (47 | ) | 126 | 95 | 221 | ||||||||||||||||
| Investing activities | ||||||||||||||||||||||||
| Capital expenditures | (321 | ) | (14 | ) | (335 | ) | (209 | ) | (48 | ) | (257 | ) | ||||||||||||
| Loans to shareholders | - | (37 | ) | (37 | ) | (120 | ) | (101 | ) | (221 | ) | |||||||||||||
| Other | 90 | (3 | ) | 87 | 4 | (31 | ) | (27 | ) | |||||||||||||||
| Cash used in investing activities | (231 | ) | (54 | ) | (285 | ) | (325 | ) | (180 | ) | (505 | ) | ||||||||||||
| Financing activities | ||||||||||||||||||||||||
| Loans from shareholders, net of repayments | 337 | - | 337 | 139 | - | 139 | ||||||||||||||||||
| Finance costs (cash) | (13 | ) | (1 | ) | (14 | ) | (6 | ) | - | (6 | ) | |||||||||||||
| Other | (28 | ) | - | (28 | ) | - | - | - | ||||||||||||||||
| Cash provided by financing activities | 296 | (1 | ) | 295 | 133 | - | 133 | |||||||||||||||||
1. Balances represent respective entity’s 100% share.
The summarized financial information presented is the amounts included in the financial statements of the joint venture entities adjusted for fair value adjustments made at the time of acquisition, as appropriate. The fair value adjustments related to the Company's jointly controlled equity interest in Equion principally relate to property, plant and equipment, provisions and the related indemnification asset and goodwill.
The shareholders of TSEUK have provided an unsecured loan facility totaling $2.4 billion to TSEUK, of which Talisman is committed to $1.2 billion, for the purpose of funding capital expenditures of TSEUK. As at March 31, 2014, $1.9 billion has been drawn under this facility, of which Talisman’s share is $984 million (December 31, 2013 - $812 million). Loans under this facility bear interest at the UK interest rate swap rate plus 2.5%, and are repayable quarterly in equal installments based upon a five year repayment period calculated from the date each loan is advanced. All outstanding loans mature December 31, 2017, although the maturity date may be extended from time to time upon agreement between the shareholders and TSEUK. Prior to the maturity date, TSEUK may repay, in full or in part, the balance outstanding on any loan under this facility.
The loan due to Equion of $306 million (December 31, 2013 - $288 million) is unsecured, due upon demand and bears interest at LIBOR plus 0.30%.
There have been no significant changes in expected future commitments of TSEUK and Equion, and the timing of those payments, since December 31, 2013.
12
TSEUK is required to provide demand letters of credit as security in relation to certain decommissioning obligations in the UK pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). Refer to “Liquidity Risk” in note 16.
Investments in Joint Operations
Talisman accounts for joint operations using proportionate consolidation. Talisman’s interest in the Talisman Sasol Montney Partnership (TSMP) has been accounted for as a joint operation and continues to be proportionately consolidated as Talisman shares its interests in the partnership assets based on the Company’s 50% ownership interest and is jointly and severally liable for the obligations of the partnership. TSMP’s principal place of operations and country of incorporation is Canada. In 2013, Talisman reached an agreement to sell part of its Montney acreage in British Columbia, which included Talisman’s interest in TSMP. Talisman’s interest in TSMP was therefore classified as assets held for sale. Talisman completed the sale during the three month period ended March 31, 2014 (note 4).
Investments in Associate
Talisman had a 12.152% interest in Ocensa whose principal place of operations and country of incorporation is Colombia. On January 17, 2013, Ocensa’s shareholders approved a resolution to change the nature of Ocensa’s business from a cost recovery operating model to a profit oriented operating model, and certain elements of the governance structure within Ocensa. Among these changes, the arrangement for appointing the Board of Directors was modified, which provided Talisman with the ability to appoint one director to Ocensa’s Board based upon its ownership interest in Ocensa. Talisman was able to exercise significant influence over Ocensa from its ability to participate in the significant operating and financing decisions of Ocensa and as a result, Talisman accounted for its investment in Ocensa using the equity method commencing January 17, 2013 until December 19, 2013, when Talisman sold its 12.152% equity interest in Ocensa. In addition, Talisman obtained the option to sell, on a temporary or permanent basis, all or a part of its entitlement to shipping capacity on the Ocensa pipeline (the Transportation Rights). As a result of this change, Talisman attributed $108 million to the Transportation Rights given its ability to sell excess transportation capacity in the Colombian markets. After the sale of its interest in Ocensa, Talisman retained its crude oil transportation rights and its right to generate third party revenue from sales of excess capacity (note 7).
The following table summarizes the financial information of Ocensa. No summarized balance sheet of Ocensa is presented as there was no investment balance at the beginning or end of 2012 and 2013, or as at March 31, 20141.
Three months ended March 31 | ||||||||
| Summarized Statements of Income | 2014 | 2013 | ||||||
| Revenue | - | 260 | ||||||
| Expenses (including income taxes) | - | 174 | ||||||
| Net income and comprehensive income | - | 86 | ||||||
Talisman’s Interest | 12.152 | % | 12.152 | % | ||||
| Talisman’s share of net income and comprehensive income | - | 10 | ||||||
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| Three months ended March 31 | ||||||||
| Summarized Statements of Cash Flows | 2014 | 2013 | ||||||
| Operating activities | ||||||||
| Net income | - | 86 | ||||||
| Items not involving cash | - | 52 | ||||||
| Changes in non-cash working capital | - | 165 | ||||||
| Cash provided by operating activities | - | 303 | ||||||
| Cash used in investing activities | - | (4 | ) | |||||
| Cash used in financing activities | - | (55 | ) | |||||
1. Talisman recognized Ocensa as an associate effective January 17, 2013, when Talisman gained significant influence, until December 19, 2013 when the Company sold its 12.152% equity interest in Ocensa.
6. GOODWILL
| Continuity of goodwill | Three months ended March 31, 2014 | Year ended December 31, 2013 | ||||||
| Balance, beginning of period | 575 | 775 | ||||||
| Reclassified to assets held for sale (note 4) | (4 | ) | (14 | ) | ||||
| Disposals | (1 | ) | (1 | ) | ||||
| Impairments | - | (185 | ) | |||||
| Balance, end of period | 570 | 575 | ||||||
During 2013, the Company recorded a non-taxable impairment of $185 million relating to North Sea goodwill arising from diminution of the Company’s view of the value of its North Sea assets.
7. OTHER ASSETS
March 31, 2014 | December 31, 2013 | |||||||
| Accrued pension asset | 4 | - | ||||||
| Decommissioning sinking fund | 51 | 50 | ||||||
| Transportation rights (net of $10 million accumulated depreciation) (note 5) | 98 | 100 | ||||||
| Other | 22 | 10 | ||||||
| Total | 175 | 160 | ||||||
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8. YME REMOVAL OBLIGATION
In March 2013, Talisman, acting on behalf of its partners in the Yme field in Norway, entered into an agreement with the platform contractor. This agreement terminated all existing Yme contracts and outstanding disputes between the Yme partners and the platform contractor, set out the provisions regarding the removal of the existing above-surface Yme structure, the delivery of the existing above-surface Yme structure to the platform contractor (which Talisman, acting on behalf of the Yme partners, will complete as the “Talisman Works”) and provided for a payment of $470 million from the platform contractor to the Yme partners to fund the cost of the Talisman Works. The Yme partners agreed to deposit $409 million into an escrow account, which can only be withdrawn for purposes of settling costs and liabilities associated with the Talisman Works.
As at March 31, 2014, Talisman’s share of the liability associated with the Talisman Works in the amount of $236 million has been recorded as the Yme removal obligation of which $102 million has been classified as current, as it is expected to be settled within the next twelve months, while the remaining $134 million has been classified as long-term. Talisman’s share of the cash held in the escrow account in the amount of $199 million has been recorded as restricted cash of which $102 million has been classified as current, while the remaining $97 million has been classified as long-term. During the three month period ended March 31, 2014, $16 million in eligible expenditures, were incurred on the Talisman Works which reduced both the restricted cash and the Yme removal obligation by an equal amount.
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9. OIL AND GAS ASSETS
The cost and accumulated DD&A of the Company’s PP&E (including corporate assets) and E&E assets are as follows:
| PP&E | E&E assets | Total | ||||||||||
| Cost | ||||||||||||
| At December 31, 2012 | 21,550 | 5,577 | 27,127 | |||||||||
| Additions | 1,943 | 522 | 2,465 | |||||||||
| Disposals and derecognition | (354 | ) | (39 | ) | (393 | ) | ||||||
| Transfers from E&E assets to PP&E | 481 | (481 | ) | - | ||||||||
| Change in decommissioning liabilities | 271 | (5 | ) | 266 | ||||||||
| Expensed to dry hole | - | (89 | ) | (89 | ) | |||||||
| Transfers to assets held for sale | (852 | ) | (92 | ) | (944 | ) | ||||||
| At December 31, 2013 | 23,039 | 5,393 | 28,432 | |||||||||
| Additions | 454 | 101 | 555 | |||||||||
| Disposals and derecognition | (24 | ) | - | (24 | ) | |||||||
| Transfers from E&E assets to PP&E | 34 | (34 | ) | - | ||||||||
| Change in decommissioning liabilities | (6 | ) | (4 | ) | (10 | ) | ||||||
| Expensed to dry hole | - | (16 | ) | (16 | ) | |||||||
| Transfers to assets held for sale (note 4) | (921 | ) | - | (921 | ) | |||||||
| At March 31, 2014 | 22,576 | 5,440 | 28,016 | |||||||||
| Accumulated DD&A | ||||||||||||
| At December 31, 2012 | 11,088 | 2,258 | 13,346 | |||||||||
| Charge for the period | 1,921 | - | 1,921 | |||||||||
| Disposals and derecognition | (269 | ) | (36 | ) | (305 | ) | ||||||
| Impairment losses | 755 | 17 | 772 | |||||||||
| Impairment reversals | - | (11 | ) | (11 | ) | |||||||
| Transfers to assets held for sale | (208 | ) | - | (208 | ) | |||||||
| At December 31, 2013 | 13,287 | 2,228 | 15,515 | |||||||||
| Charge for the period | 477 | 2 | 479 | |||||||||
| Disposals and derecognition | (8 | ) | - | (8 | ) | |||||||
| Impairment losses (note 10) | - | 130 | 130 | |||||||||
| Transfers from PP&E to E&E assets | (20 | ) | 20 | - | ||||||||
| Transfers to assets held for sale (note 4) | (838 | ) | - | (838 | ) | |||||||
| . | ||||||||||||
| At March 31, 2014 | 12,898 | 2,380 | 15,278 | |||||||||
| Net book value | ||||||||||||
| At March 31, 2014 | 9,678 | 3,060 | 12,738 | |||||||||
| At December 31, 2013 | 9,752 | 3,165 | 12,917 | |||||||||
| At December 31, 2012 | 10,462 | 3,319 | 13,781 | |||||||||
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10. IMPAIRMENT
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Impairment losses | ||||||||
| E&E assets | 130 | 7 | ||||||
| 130 | 7 | |||||||
During the three month period ended March 31, 2014, the Company recorded $130 million of impairment expense in Norway as a result of the Company’s decision to withdraw from an exploration license following technical evaluation, representing the full book value of the license.
During the three month period ended March 31, 2013, the Company incurred approximately $7 million of cost, representing the full book value, related to the Yme platform and impaired these costs.
11. DECOMMISSIONING LIABILITIES
| Continuity of decommissioning liabilities | Three months ended March 31, 2014 | Year ended December 31, 2013 | ||||||
| Balance, beginning of period | 1,769 | 1,557 | ||||||
| Liabilities incurred during the period | 2 | 73 | ||||||
| Liabilities settled during the period | (18 | ) | (77 | ) | ||||
| Accretion expense (note 12) | 15 | 36 | ||||||
| Revisions in estimated cash flows | (12 | ) | 405 | |||||
| Change in discount rate | - | (212 | ) | |||||
| Disposals | (4 | ) | (4 | ) | ||||
| Reclassified to liabilities associated with assets held for sale (note 4) | (40 | ) | (9 | ) | ||||
| Balance, end of period | 1,712 | 1,769 | ||||||
| Expected to be settled within one year | 48 | 42 | ||||||
| Expected to be settled in more than one year | 1,664 | 1,727 | ||||||
| 1,712 | 1,769 | |||||||
The provision has been discounted using a weighted average credit-adjusted risk free rate of 3.8% at March 31, 2014 (December 31, 2013 – 3.8%), which excludes the impact of inflation.
12. FINANCE COSTS
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Interest on long-term debt | 68 | 67 | ||||||
| Miscellaneous interest expense and other fees | 8 | 9 | ||||||
| Accretion expense (note 11) | 15 | 8 | ||||||
| Less: interest capitalized | - | (6 | ) | |||||
| 91 | 78 | |||||||
Interest capitalization ceased in the HST/HSD blocks in Vietnam upon first production in May 2013.
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13. LONG-TERM DEBT
March 31, 2014 | December 31, 2013 | |||||||
| Bank Credit Facilities | - | 250 | ||||||
| Commercial Paper | - | 544 | ||||||
| Tangguh Project Financing | 48 | 81 | ||||||
| Debentures and Notes (Unsecured) | ||||||||
| US$ denominated | 3,902 | 3,951 | ||||||
| UK£ denominated (UK£ million) | 415 | 413 | ||||||
| Gross debt | 4,365 | 5,239 | ||||||
| Less: current portion | (5 | ) | (882 | ) | ||||
Long-term debt | 4,360 | 4,357 | ||||||
During the three months ended March 31, 2014, Talisman repaid $250 million in bankers’ acceptance, $544 million in commercial paper, $50 million of 8.25% notes, and $33 million in Tangguh project financing.
Bank Credit Facilities and Commercial Paper
At March 31, 2014, Talisman had unsecured credit facilities totaling $2.9 billion, consisting of facilities of C$3 billion (Facility No. 1), maturing March 19, 2018 and $200 million (Facility No. 2), maturing October 21, 2018.
Borrowings under Facility No. 1 are available in the form of prime loans, C$ or US$ bankers’ acceptances, US$ base rate loans, LIBOR-based loans and letters of credit. In addition, drawings to a total of C$1.0 billion are available in the form of letters of credit. Borrowings under Facility No. 2 are available in the form of prime loans, C$ or US$ guaranteed notes, US$ base rate loans, LIBOR-based loans and letters of credit.
During the three month period ended March 31, 2014, the Company repaid the outstanding bankers’ acceptance and commercial paper programs in full. Available borrowing capacity was $2.9 billion at March 31, 2014.
On May 5, 2014, Talisman amended certain terms of Facility No.1, converting the denomination to US dollars, extending the facility to $3 billion, and extending the term to five years maturing on March 19, 2019.
Talisman is in compliance with all of its debt covenants. The Company’s principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter.
14. OTHER LONG-TERM OBLIGATIONS
March 31, 2014 | December 31, 2013 | |||||||
| Accrued pension and other post-employment benefits liability | 120 | 114 | ||||||
| Deferred credits | 40 | 33 | ||||||
| Long-term portion of discounted obligations under finance leases | 42 | 44 | ||||||
| Long-term portion of share-based payments liability (note 15) | 18 | 10 | ||||||
| Other | 46 | 45 | ||||||
| 266 | 246 | |||||||
The fair value of financial liabilities included above approximates the carrying amount.
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15. SHARE CAPITAL AND SHARE-BASED PAYMENTS
Authorized
Talisman's authorized share capital consists of an unlimited number of common shares without nominal or par value and an unlimited number of first and second preferred shares.
Common Shares Issued
Continuity of common shares | Three months ended March 31, 2014 | Year ended December 31, 2013 | ||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Balance, beginning of period | 1,031,356,870 | 1,723 | 1,025,449,730 | 1,639 | ||||||||||||
| Issued on exercise of stock options | 446,244 | 5 | 3,223,810 | 41 | ||||||||||||
| Shares purchased and held in trust for long-term PSU plan | - | - | (100,000 | ) | (1 | ) | ||||||||||
| Shares released from trust for long-term PSU plan | 1,956,772 | 31 | 2,783,330 | 44 | ||||||||||||
| Balance, end of period | 1,033,759,886 | 1,759 | 1,031,356,870 | 1,723 | ||||||||||||
Subsequent to March 31, 2014, 39,980 stock options were exercised for shares and no common shares were purchased and held in trust for the long-term PSU plan. There were 1,033,799,866 common shares outstanding at May 2, 2014.
During the three month period ended March 31, 2014, Talisman declared common share dividends of $0.0675 per share for an aggregate dividend of $70 million.
Preferred Shares Issued
| Continuity of preferred shares | Three months ended March 31, 2014 | Year ended December 31, 2013 | ||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Cumulative Redeemable Rate Reset First Preferred Shares, 4.2% Series 1: | ||||||||||||||||
| Balance, beginning and end of period | 8,000,000 | 191 | 8,000,000 | 191 | ||||||||||||
During the three month period ended March 31, 2014, Talisman declared preferred share dividends of C$0.2625 per share for an aggregate dividend of $2 million.
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Share-Based Payments1
| Options | Restricted Share Units (RSU) | Deferred Share Units (DSU) | Long-term Performance Share Units (PSU) | |||||||||||||
| Continuity of share-based payment plans | Number of shares underlying options | Number of units | Number of units | Number of units | ||||||||||||
| Outstanding at December 31, 2013 | 43,285,254 | 7,005,696 | 1,932,380 | 12,496,313 | ||||||||||||
| Granted | - | 25,221 | 96,662 | - | ||||||||||||
| Dividend equivalent | - | 45,751 | 19,559 | 65,168 | ||||||||||||
| Exercised for common shares/settled | (446,244 | ) | (124,358 | ) | (69,574 | ) | (1,956,772 | ) | ||||||||
| Surrendered for cash | (24,737 | ) | - | - | - | |||||||||||
| Forfeited | (1,497,878 | ) | (215,689 | ) | - | (921,754 | ) | |||||||||
| Outstanding at March 31, 2014 | 41,316,395 | 6,736,621 | 1,979,027 | 9,682,955 | ||||||||||||
| Exercisable at March 31, 2014 | 33,146,203 | |||||||||||||||
| Weighted average grant price during period | $nil | $nil | ||||||||||||||
1. Dollar amounts in share-based payments tables are provided in C$.
During the three month period ended March 31, 2014, the Company recorded a share-based payments recovery of $32 million (2013 - $22 million expense) in respect of the following plans: stock options - $37 million recovery, PSUs - $6 million expense, RSUs - $1 million expense, and DSU - $2 million recovery. The share-based payments expense includes cash payments of $2 million (2013 - $2 million) to employees in settlement of fully accrued share-based payments liabilities for stock options and cash units exercised in the period. In general and administrative expense in the condensed Consolidated Statement of Income (Loss), the Company recognized a $2 million DSU recovery relating to the directors and executive deferrals.
Of the combined obligation for cash-settled stock option, cash unit, DSU and RSU plans of $114 million (December 31, 2013 – $152 million), $96 million (December 31, 2013 – $142 million) is included in accounts payable and accrued liabilities on the interim condensed Consolidated Balance Sheets and $18 million (December 31, 2013 – $10 million) is included in other long-term obligations.
Subsequent to March 31, 2014, no stock options were granted or surrendered for cash, 39,980 stock options were exercised for shares, and 758,823 were forfeited with 40,517,592 outstanding at May 2, 2014. Subsequent to March 31, 2014, 1,271,227 PSUs were granted, 155,064 PSUs were forfeited, with 10,799,118 outstanding at May 2, 2014. Subsequent to March 31, 2014, 7,748,168 RSUs were granted, 2,135,422 were exercised and 173,359 were forfeited, and 163,564 were granted to TSEUK employees, including reinvested dividends, with 12,339,572 outstanding at May 2, 2014. There were 738,718 DSU’s granted subsequent to March 31, 2014, with 2,717,745 outstanding at May 2, 2014.
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16. FINANCIAL INSTRUMENTS
Talisman’s financial assets and liabilities at March 31, 2014 consisted of cash and cash equivalents, accounts receivable, available-for-sale investments, bank indebtedness, accounts payable and accrued liabilities, loans from joint ventures, long-term debt (including the current portion) and risk management assets and liabilities arising from the use of derivative financial instruments.
Fair Value of Financial Assets and Liabilities
The fair values of cash and cash equivalents, accounts receivable, bank indebtedness, accounts payable and accrued liabilities, and loans from joint ventures approximate their carrying values due to the short-term maturity of those instruments.
Borrowings under bank credit facilities are short-term in nature and are market rate-based, thus, carrying value approximates fair value. The fair value of public debentures and notes is based on market quotations, which reflect the discounted present value of the principal and interest payments using the effective yield for instruments having the same term and risk characteristics. The fair values of private notes are based on estimations provided by third parties. The fair value of Talisman’s floating rate debt is determined by discounting future estimated coupon payments at the current market interest rate. The fair value of Talisman’s long-term debt (including the current portion) at March 31, 2014 was $4.7 billion (December 31, 2013 - $5.5 billion), while the carrying value was $4.4 billion (December 31, 2013 - $5.2 billion). The Company uses level 2 inputs as described below to estimate the fair value of the outstanding long-term debt as at March 31, 2014.
The fair values of all other financial assets and liabilities approximate their carrying values.
Risk management assets and liabilities are recorded at their estimated fair values. To estimate fair value, the Company uses quoted market prices when available, or models that utilize observable market data. In addition to market information, the Company incorporates transaction-specific details that market participants would utilize in a fair value measurement, including the impact of non-performance risk. The Company’s non-performance risk is determined based on third party quotes for the Company’s debt instruments with maturity dates that are similar, or in close approximation, to the maturity dates of the corresponding financial instrument. The Company characterizes inputs used in determining fair value using a hierarchy that prioritizes inputs depending on the degree to which they are observable.
The three levels of the fair value hierarchy are as follows:
| · | Level 1 – inputs represent quoted prices in active markets for identical assets or liabilities (for example, exchange-traded commodity derivatives). Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an ongoing basis; |
| · | Level 2 – inputs other than quoted prices included within level 1 that are observable, either directly or indirectly, as of the reporting date. Level 2 valuations are based on inputs, including quoted forward prices for commodities, market interest rates and volatility factors, which can be observed or corroborated in the marketplace. The Company obtains information from sources such as the New York Mercantile Exchange (NYMEX) and independent price publications; and |
| · | Level 3 – inputs that are less observable, unavailable or where the observable data does not support the majority of the instrument’s fair value, such as the Company’s internally developed assumptions about market participant assumptions used in pricing an asset or liability, for example, an estimate of future cash flows used in the Company’s internally developed present value of future cash flows model that underlies the fair value measurement. |
21
In forming estimates, the Company utilizes the most observable inputs available for valuation purposes. If a fair value measurement reflects inputs of different levels within the hierarchy, the measurement is categorized based upon the lowest level of input that is significant to the fair value measurement. The valuation of over-the-counter financial swaps and collars is based on similar transactions observable in active markets or industry standard models that rely primarily on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. These are categorized as level 2.
Fair values for cross-currency and interest rate derivative instruments are determined based on the estimated cash payment or receipt necessary to settle the contract. Cash payments or receipts are based on discounted cash flow analysis using current market rates and prices. Fair values for commodity price derivatives are based on discounted cash flow analysis using current market rates and prices and option pricing models using forward pricing curves and implied volatility, as appropriate, which are compared to quotes received from financial institutions for reasonability.
The following table presents the Company’s risk management assets and liabilities measured at fair value for each hierarchy level at March 31, 2014:
| Fair value measurements using | ||||||||||||||||
| Level 1 inputs | Level 2 inputs | Level 3 inputs | Total fair value | |||||||||||||
| Assets | ||||||||||||||||
| Interest rate swaps | - | 20 | - | 20 | ||||||||||||
| Commodity contracts | - | 16 | - | 16 | ||||||||||||
| Liabilities | ||||||||||||||||
| Commodity contracts | - | 140 | - | 140 | ||||||||||||
Risk Management Assets, Liabilities, Gains and Losses
| Derivative instrument | Balance sheet presentation | March 31, 2014 | December 31, 2013 | ||||||
| Interest rate swaps | Current assets | 13 | 13 | ||||||
| Interest rate swaps | Non-current assets | 7 | 6 | ||||||
| Commodity contracts | Current assets | - | 4 | ||||||
| Commodity contracts | Non-current assets | 16 | 14 | ||||||
| Risk management assets | 36 | 37 | |||||||
| Commodity contracts | Current liabilities | 120 | 101 | ||||||
| Commodity contracts | Non-current liabilities | 20 | 37 | ||||||
| Risk management liabilities | 140 | 138 | |||||||
During the three month period ended March 31, 2014, the Company recorded a loss on held-for-trading financial instruments of $60 million (2013 - $80 million).
Currency Risk
Talisman operates internationally and is therefore exposed to foreign exchange risk. Talisman’s primary exposure is from fluctuations in the US$ relative to the C$, UK£, and NOK.
22
Talisman manages its foreign exchange exposure in a number of ways. By denominating most of its borrowings in US$, the Company is able to reduce some of its economic exposure to currency fluctuations. Talisman also manages its translation exposure by generally matching internal borrowings with its subsidiaries’ functional currencies. The Company purchases foreign currencies, mostly at spot value, to meet its current foreign currency obligations as they come due.
In respect of financial instruments existing at March 31, 2014, a 1% strengthening of the US$ against the other currencies noted above, with all other variables assumed constant, would have resulted in an increase of $7 million in net income and a $7 million impact on other comprehensive loss during the three month period ended March 31, 2014. A similar weakening of the US$ would have had the opposite impact.
Interest Rate Risk
Talisman is exposed to interest rate risk principally by virtue of its borrowings including loans from joint ventures. Borrowing at floating rates exposes Talisman to short-term movements in interest rates. Borrowing at fixed rates exposes Talisman to reset risk (i.e. at debt maturity). Risk management activities aim to manage the mix of fixed-to-floating debt to best manage the trade-off between longer term interest rate reset risk and shorter term volatility in interest rates.
In order to mitigate its exposure to interest rate changes, Talisman enters into interest rate swaps from time to time to manage the ratio of fixed rate debt to floating rate debt. At March 31, 2014, the Company had fixed-to-floating interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015. During the three month period ended March 31, 2014, the fair value of the fixed-to-floating interest rate swaps had no change.
In respect of financial instruments existing at March 31, 2014, a 1% increase in interest rates would have resulted in a $2 million decrease in net income and a $2 million impact on other comprehensive loss during the three month period ended March 31, 2014.
Credit Risk
A significant proportion of Talisman’s accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At March 31, 2014, approximately 94% of the Company's trade accounts receivable was current and the largest single counterparty exposure, accounting for 14% of the total, was with a highly rated counterparty. Concentration of counterparty credit risk is mitigated by having a broad domestic and international customer base of highly rated counterparties.
Liquidity Risk
Talisman is exposed to liquidity risk, which is the risk that the Company may be unable to generate or obtain sufficient cash to meet its commitments as they come due. Talisman mitigates this risk through its management of cash, debt, committed credit capacity and its capital program.
Talisman manages its liquidity requirements by use of both short-term and long-term cash forecasts, and by maintaining appropriate undrawn capacity under committed bank credit facilities. At March 31, 2014, Talisman had unsecured credit facilities totaling $2.9 billion, consisting of facilities of C$3 billion (Facility No. 1), maturing March 19, 2018 and $200 million (Facility No. 2) maturing October 21, 2018. During the three month period ended March 31, 2014, the Company repaid the outstanding bankers’ acceptance and commercial paper programs in full. Available borrowing capacity was $2.9 billion at March 31, 2014.
23
In addition, the Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. At March 31, 2014, demand letters of credit guaranteed by the Company totaling $1.4 billion were issued, of which $1.3 billion were issued from uncommitted facilities. Of that total, $1.0 billion is provided as security for the costs of decommissioning obligations in the UK, as described below. The remaining outstanding letters of credit relate primarily to a retirement compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.
TSEUK is required to provide letters of credit as security in relation to certain decommissioning obligations in the United Kingdom pursuant to contractual arrangements under Decommissioning Security Agreements (DSAs). At the commencement of the joint venture, Addax assumed 49% of the decommissioning obligations of TSEUK supported by an unconditional and irrevocable guarantee from Addax’s parent company, Sinopec, to the Company.
During the month of January 2014, all remaining letters of credit issued under legacy facilities were replaced by letters of credit totaling $1.0 billion from the shared facilities of which Talisman’s share is 51%. As a result of this change, as at March 31, 2014, TSEUK has $2.5 billion of demand shared facilities in place under which letters of credit of $2.0 billion have been issued. The Company guarantees 51% of all letters of credit issued under these shared facilities.
The Company has also granted guarantees to various beneficiaries in respect of decommissioning obligations of TSEUK.
On May 5, 2014, Talisman amended certain terms of Facility No.1, converting the denomination to US dollars, extending the facility to $3 billion, and extending the term to five years maturing on March 19, 2019.
Except for commodity price derivative contracts that mature as noted below, long-term debt that matures as outlined in note 13 and other long-term obligations detailed in note 14, all of the Company’s financial liabilities are due within one year.
Commodity Price Risk
Talisman is exposed to commodity price risk since its revenues are dependent on the price of crude oil, natural gas and NGLs. Talisman enters into derivative instruments from time to time to mitigate commodity price risk volatility under guidelines approved by the Board of Directors. The Company may hedge a portion of its future production to protect cash flows to allow it to meet its strategic objectives.
The Company had the following commodity price derivative contracts outstanding at March 31, 2014, none of which are designated as hedges:
Two-way collars (Oil) | Term | bbls/d | Floor/ceiling $/bbl | Fair value asset (liability) |
| Dated Brent oil index | 2014 Apr - Jun | 5,000 | 90.00/119.70 | - |
| Dated Brent oil index | 2014 Apr - Dec | 10,000 | 95.00/110.07 | (3) |
| Dated Brent oil index | 2014 Apr - Dec | 10,000 | 90.00/105.22 | (11) |
| NYMEX WTI oil index | 2014 Apr - Dec | 5,000 | 80.00/95.00 | (7) |
| Dated Brent oil index | 2015 Jan - Dec | 5,000 | 90.00/100.01 | (9) |
| NYMEX WTI oil index | 2015 Jan - Dec | 5,000 | 80.00/95.02 | (2) |
| Dated Brent oil index | 2015 Jan - Dec | 20,000 | 90.00/106.16 | (15) |
| (47) |
24
Fixed priced swaps (Oil) | Term | bbls/d | $/bbl | Fair value asset (liability) |
| Dated Brent oil index | 2014 Apr - Jun | 10,000 | 103.06 | (4) |
| NYMEX WTI oil index | 2014 Apr - Dec | 2,500 | 91.91 | (4) |
| Dated Brent oil index | 2014 Apr - Dec | 10,000 | 104.02 | (6) |
| NYMEX WTI oil index | 2014 Apr - Dec | 10,000 | 94.28 | (10) |
| Dated Brent oil index | 2014 Jul - Dec | 10,000 | 103.31 | (4) |
| Dated Brent oil index | 2015 Jan - Dec | 10,000 | 100.46 | (5) |
| Dated Brent oil index | 2015 Jan - Dec | 1,000 | 104.00 | 1 |
| Dated Brent oil index | 2015 Jan - Dec | 9,000 | 100.59 | (4) |
| (36) |
Two-way collars (Gas) | Term | mcf/d | Floor/ceiling $/mcf | Fair value asset (liability) |
| NYMEX HH LD | 2014 Apr - Dec | 94,936 | 4.21/4.71 | (5) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.21/4.64 | (3) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.21/4.99 | (1) |
| NYMEX HH LD | 2015 Jan - Dec | 47,468 | 4.23/4.87 | 1 |
| NYMEX HH LD | 2015 Jan - Dec | 94,936 | 4.21/5.06 | 3 |
| (5) |
Fixed priced swaps (Gas) | Term | mcf/d | $/mcf | Fair value asset (liability) |
| NYMEX HH LD | 2014 Apr - Oct | 47,468 | 4.17 | (5) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.24 | (6) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.25 | (6) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.34 | (5) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.42 | (4) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.44 | (3) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.29 | (5) |
| NYMEX HH LD | 2014 Apr - Dec | 47,468 | 4.43 | (4) |
| NYMEX HH LD | 2015 Jan - Dec | 47,468 | 4.54 | 2 |
| NYMEX HH LD | 2015 Jan - Dec | 47,468 | 4.39 | - |
| NYMEX HH LD | 2015 Jan - Dec | 47,468 | 4.48 | 1 |
| NYMEX HH LD | 2015 Jan - Dec | 47,468 | 4.39 | (1) |
| (36) |
Fixed priced swaps (Power) | Term | MWh | $CAD/MWh | Fair value asset (liability) |
| Alberta Power | 2014 Apr - Dec | 7 | 74.66 | - |
| Alberta Power | 2015 Jan - Dec | 5 | 73.72 | - |
| Alberta Power | 2016 Jan - Dec | 2 | 73.83 | - |
| Alberta Power | 2017 Jan - Dec | 1 | 74.75 | - |
| Alberta Power | 2018 Jan - Dec | 1 | 74.75 | - |
| - |
25
Subsequent to March 31, 2014, the Company entered into a Dated Brent swap for 2016 of 10,000 bbls/d for $98.01/bbl, a NYMEX HH swap for 2015 of 47,468 mcf/d for $4.53/mcf, a NYMEX HH collar for 2016 of 47,468 mcf/d for $4.21/$4.75/mcf, and a NYMEX HH swap for 2016 of 47,468 mcf/d for $4.48/mcf.
In respect of outstanding financial instruments and assuming forward commodity prices in existence at March 31, 2014, an increase of $1/bbl in the price of oil and an increase of $0.10/mcf in the price of gas would have reduced the net fair value of commodity derivatives, thereby resulting in a decrease in net income of $41 million for the three month period ended March 31, 2014. A similar decrease in commodity prices would result in an increase in net income of approximately $43 million for the three month period ended March 31, 2014.
17. CONTINGENCIES AND COMMITMENTS
Provisions and Contingencies
From time to time, Talisman is the subject of litigation arising out of the Company’s operations. Damages claimed under such litigation may be material or may be indeterminate and the outcome of such litigation may materially impact the Company’s financial condition or results of operations. While Talisman assesses the merits of each lawsuit and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not currently expected to have a material impact on the Company’s financial position.
The New York Attorney General has commenced an investigation, pursuant to the Martin Act, into the disclosure practices of companies engaged in hydraulic fracturing in the New York state area. The Martin Act provides broad authority to commence and conduct investigations, whether upon receipt of a complaint, or on the Attorney General’s own initiative. Subpoenas have been issued to a number of companies, including Talisman. The Company has been cooperating with the New York Attorney General in the investigation. No enforcement action has been taken against Talisman, nor has the Company been advised that any enforcement action is imminent.
Commitments
There have been no additional significant changes in the Company’s expected future commitments, and the timing of those payments, since December 31, 2013.
18. OTHER INCOME
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Pipeline and customer treating tariffs | 17 | 9 | ||||||
| Investment income | 8 | 8 | ||||||
| Interest on loan to TSEUK (note 5) | 8 | 4 | ||||||
| Marketing income | 15 | 6 | ||||||
| 48 | 27 | |||||||
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19. OTHER EXPENSES, NET
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Foreign exchange gain | (6 | ) | (32 | ) | ||||
| Restructuring | 3 | 17 | ||||||
| Other miscellaneous | 11 | 21 | ||||||
| 8 | 6 | |||||||
20. INCOME TAXES
Current Income Tax Expense
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| North America | (1 | ) | 1 | |||||
| Southeast Asia | 116 | 141 | ||||||
| North Sea | - | (18 | ) | |||||
| Other | 16 | 23 | ||||||
| Total | 131 | 147 | ||||||
Deferred Income Tax (Recovery) Expense
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| North America | 52 | (59 | ) | |||||
| Southeast Asia | (9 | ) | (6 | ) | ||||
| North Sea | (84 | ) | 87 | |||||
| Other | 10 | (5 | ) | |||||
| Total | (31 | ) | 17 | |||||
21. SUPPLEMENTAL CASH FLOW
Items Not Involving Cash
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Depreciation, depletion and amortization | 469 | 421 | ||||||
| Impairment | 130 | 7 | ||||||
| Dry hole | 16 | - | ||||||
| Share-based payments (recovery) expense | (31 | ) | 20 | |||||
| Gains on disposals | (559 | ) | - | |||||
| Unrealized loss on held-for-trading financial instruments | 3 | 48 | ||||||
| Deferred income tax (recovery) | (31 | ) | 17 | |||||
| Foreign exchange | (5 | ) | - | |||||
| (Income) loss from joint ventures and associates, after tax | (6 | ) | 2 | |||||
| Other | 7 | (28 | ) | |||||
| (7 | ) | 487 | ||||||
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Other Cash Flow Information
| Three months ended March 31 | ||||||||
| 2014 | 2013 | |||||||
| Cash interest paid | 53 | 56 | ||||||
| Cash interest received | 23 | 5 | ||||||
| Cash income taxes paid | 181 | 205 | ||||||
22. CASH AND CASH EQUIVALENTS
Of the cash and cash equivalents balance of $532 million (December 31, 2013 - $364 million), $293 million (December 31, 2013 - $364 million) has been invested in bank deposits and the remainder in highly rated marketable securities with original maturities of less than three months.
23. INTERESTS IN SUBSIDIARIES
The interim condensed Consolidated Financial Statements include the financial statements of Talisman Energy Inc. and its directly or indirectly owned subsidiaries. Transactions between subsidiaries are eliminated on consolidation. The following table lists the material operating subsidiaries owned directly or indirectly by Talisman as at March 31, 2014:
| Name of Subsidiary | Jurisdiction of Incorporation | Percentage of Voting Securities Owned |
| Talisman Energy Canada ¹ | Alberta | 100% |
Talisman Energy USA Inc. | Delaware | 100% |
| Talisman Alberta Shale Partnership | Alberta | 100% |
| Talisman Energy Norge AS | Norway | 100% |
Talisman (Corridor) Ltd. | Barbados | 100% |
| Talisman (Vietnam 15-2/01) Ltd. | Alberta | 100% |
| Talisman Malaysia Limited | Barbados | 100% |
| Talisman Malaysia (PM3) Limited | Barbados | 100% |
| Talisman (Algeria) BV | The Netherlands | 100% |
| 1. | Talisman Energy Canada is an Alberta general partnership which currently carries on substantially all of Talisman’s conventional Canadian oil and gas operations. |
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24. SEGMENTED INFORMATION
Talisman's activities are conducted in four geographic segments: North America, the North Sea, Southeast Asia and Other. The North America segment includes operations and exploration in Canada and the US. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam and Papua New Guinea and in Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. The Company also has non-operated production in Algeria, operations and exploration activities in Colombia, and exploration activities in Sierra Leone and the Kurdistan Region of Iraq. In 2013, the Company exited Poland and received government approval to transfer its interests in Sierra Leone. Furthermore, the Company is in the process of exiting Peru. For ease of reference, all of the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and the Kurdistan Region of Iraq are referred to collectively as the Other geographic segment. All activities relate to the exploration, development, production and transportation of oil, liquids and natural gas.
| North America (1) | Southeast Asia (2) | North Sea (3) | Other (4) | Total | ||||||||||||||||||||||||||||||||||||
Three months ended March 31, | Three months ended March 31, | Three months ended March 31, | Three months ended March 31, | Three months ended March 31, | ||||||||||||||||||||||||||||||||||||
| (millions of US$) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | ||||||||||||||||||||||||||||||
| Revenue | ||||||||||||||||||||||||||||||||||||||||
| Sales | 532 | 369 | 541 | 488 | 164 | 172 | 50 | 69 | 1,287 | 1,098 | ||||||||||||||||||||||||||||||
| Other income | 20 | 16 | 1 | - | 9 | 4 | 18 | 7 | 48 | 27 | ||||||||||||||||||||||||||||||
| Income (loss) from joint ventures and associates, after tax | - | - | - | - | (17 | ) | (52 | ) | 23 | 50 | 6 | (2 | ) | |||||||||||||||||||||||||||
| Total revenue and other income | 552 | 385 | 542 | 488 | 156 | 124 | 91 | 126 | 1,341 | 1,123 | ||||||||||||||||||||||||||||||
| Segmented expenses | ||||||||||||||||||||||||||||||||||||||||
| Operating | 134 | 147 | 122 | 103 | 98 | 71 | 7 | 8 | 361 | 329 | ||||||||||||||||||||||||||||||
| Transportation | 21 | 27 | 15 | 14 | 7 | 8 | 6 | 2 | 49 | 51 | ||||||||||||||||||||||||||||||
| DD&A | 266 | 281 | 116 | 83 | 77 | 46 | 10 | 11 | 469 | 421 | ||||||||||||||||||||||||||||||
| Impairment | - | - | - | - | 130 | 7 | - | - | 130 | 7 | ||||||||||||||||||||||||||||||
| Dry hole | - | - | 17 | 3 | (1 | ) | - | - | (3 | ) | 16 | - | ||||||||||||||||||||||||||||
| Exploration | 6 | 8 | 17 | 20 | 13 | 13 | 16 | 34 | 52 | 75 | ||||||||||||||||||||||||||||||
| Other | 9 | 28 | 1 | 6 | (1 | ) | 4 | 5 | - | 14 | 38 | |||||||||||||||||||||||||||||
| Total segmented expenses | 436 | 491 | 288 | 229 | 323 | 149 | 44 | 52 | 1,091 | 921 | ||||||||||||||||||||||||||||||
| Segmented income (loss) before taxes | 116 | (106 | ) | 254 | 259 | (167 | ) | (25 | ) | 47 | 74 | 250 | 202 | |||||||||||||||||||||||||||
| Non-segmented expenses | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | 105 | 103 | ||||||||||||||||||||||||||||||||||||||
| Finance costs | 91 | 78 | ||||||||||||||||||||||||||||||||||||||
| Share-based payments expense (recovery) | (32 | ) | 22 | |||||||||||||||||||||||||||||||||||||
| Currency translation | (6 | ) | (32 | ) | ||||||||||||||||||||||||||||||||||||
| Loss on held-for-trading financial instruments | 60 | 80 | ||||||||||||||||||||||||||||||||||||||
| Gain on disposals | (559 | ) | - | |||||||||||||||||||||||||||||||||||||
| Total non-segmented expenses | (341 | ) | 251 | |||||||||||||||||||||||||||||||||||||
| Income (loss) before taxes | 591 | (49 | ) | |||||||||||||||||||||||||||||||||||||
| Capital expenditures (5) | ||||||||||||||||||||||||||||||||||||||||
| Exploration | 14 | 19 | 29 | 3 | 7 | 34 | 49 | 20 | 99 | 76 | ||||||||||||||||||||||||||||||
| Development | 314 | 290 | 78 | 103 | 45 | 103 | 5 | 4 | 442 | 500 | ||||||||||||||||||||||||||||||
| Exploration and development | 328 | 309 | 107 | 106 | 52 | 137 | 54 | 24 | 541 | 576 | ||||||||||||||||||||||||||||||
| Proceeds on dispositions | (1,340 | ) | - | |||||||||||||||||||||||||||||||||||||
| Other non-segmented | 4 | (9 | ) | |||||||||||||||||||||||||||||||||||||
| Net capital expenditures | (795 | ) | 567 | |||||||||||||||||||||||||||||||||||||
| Property, plant and equipment | 6,635 | 6,636 | 2,285 | 2,318 | 506 | 537 | 252 | 261 | 9,678 | 9,752 | ||||||||||||||||||||||||||||||
| Exploration and evaluation assets | 1,551 | 1,579 | 715 | 717 | 167 | 289 | 627 | 580 | 3,060 | 3,165 | ||||||||||||||||||||||||||||||
| Goodwill | 113 | 118 | 170 | 170 | 287 | 287 | - | - | 570 | 575 | ||||||||||||||||||||||||||||||
| Investments in joint ventures and associates | - | - | - | - | 361 | 206 | 943 | 920 | 1,304 | 1,126 | ||||||||||||||||||||||||||||||
| Other | 989 | 677 | 750 | 740 | 1,916 | 1,911 | 373 | 402 | 4,028 | 3,730 | ||||||||||||||||||||||||||||||
| Assets held for sale | 87 | 776 | - | - | - | - | - | - | 87 | 776 | ||||||||||||||||||||||||||||||
| Segmented assets | 9,375 | 9,786 | 3,920 | 3,945 | 3,237 | 3,230 | 2,195 | 2,163 | 18,727 | 19,124 | ||||||||||||||||||||||||||||||
| Non-segmented assets | 39 | 37 | ||||||||||||||||||||||||||||||||||||||
| Total assets (5) | 18,766 | 19,161 | ||||||||||||||||||||||||||||||||||||||
| Decommissioning liabilities (5) | 402 | 450 | 273 | 280 | 1,009 | 1,009 | 28 | 30 | 1,712 | 1,769 | ||||||||||||||||||||||||||||||
| 1. North America | 2014 | 2013 | 3. North Sea | 2014 | 2013 | 4. Other | 2014 | 2013 | ||||||||||||||||||||||||||||||||
| Canada | 261 | 195 | Norway | 173 | 176 | Algeria | 35 | 69 | ||||||||||||||||||||||||||||||||
| US | 291 | 190 | Loss from TSEUK | (17 | ) | (52 | ) | Colombia6 | 56 | 57 | ||||||||||||||||||||||||||||||
| Total revenue and other income | 552 | 385 | Total revenue and other income | 156 | 124 | Total revenue and other income | 91 | 126 | ||||||||||||||||||||||||||||||||
| Canada | 2,443 | 2,544 | UK | - | - | Algeria | 252 | 260 | ||||||||||||||||||||||||||||||||
| US | 4,192 | 4,092 | Norway | 506 | 537 | Colombia | - | 1 | ||||||||||||||||||||||||||||||||
Property, plant and equipment5 | 6,635 | 6,636 | Property, plant and equipment5 | 506 | 537 | Property, plant and equipment5 | 252 | 261 | ||||||||||||||||||||||||||||||||
| Canada | 906 | 905 | UK | - | - | Colombia | 230 | 203 | ||||||||||||||||||||||||||||||||
| US | 645 | 674 | Norway | 167 | 289 | Kurdistan | 397 | 377 | ||||||||||||||||||||||||||||||||
Exploration and evaluation assets5 | 1,551 | 1,579 | Exploration and evaluation assets5 | 167 | 289 | Exploration and evaluation assets5 | 627 | 580 | ||||||||||||||||||||||||||||||||
| 2. Southeast Asia | 2014 | 2013 | 5. Current period represents balances at March 31, | |||||||||||||||||||||||||||||||||||||
| Indonesia | 263 | 319 | Prior year represents balances at December 31. | |||||||||||||||||||||||||||||||||||||
| Malaysia | 154 | 103 | ||||||||||||||||||||||||||||||||||||||
| Vietnam | 102 | 22 | 6. Balances include after-tax equity income from Equion. | |||||||||||||||||||||||||||||||||||||
| Australia | 23 | 44 | ||||||||||||||||||||||||||||||||||||||
| Total revenue and other income | 542 | 488 | ||||||||||||||||||||||||||||||||||||||
| Indonesia | 1,008 | 1,023 | ||||||||||||||||||||||||||||||||||||||
| Malaysia | 728 | 707 | ||||||||||||||||||||||||||||||||||||||
| Vietnam | 420 | 460 | ||||||||||||||||||||||||||||||||||||||
| Papua New Guinea | 37 | 40 | ||||||||||||||||||||||||||||||||||||||
| Australia | 92 | 88 | ||||||||||||||||||||||||||||||||||||||
Property, plant and equipment5 | 2,285 | 2,318 | ||||||||||||||||||||||||||||||||||||||
| Indonesia | 18 | 19 | ||||||||||||||||||||||||||||||||||||||
| Malaysia | 73 | 83 | ||||||||||||||||||||||||||||||||||||||
| Vietnam | 149 | 145 | ||||||||||||||||||||||||||||||||||||||
| Papua New Guinea | 465 | 468 | ||||||||||||||||||||||||||||||||||||||
| Australia | 10 | 2 | ||||||||||||||||||||||||||||||||||||||
Exploration and evaluation assets5 | 715 | 717 | ||||||||||||||||||||||||||||||||||||||
29